APRA’s new heatmap of superannuation performance could lack nuance and encourage a siloed focus on short-term performance, an investment manager has said, cautioning the sector could be about to see a large amount of “membership churn”.
APRA debuted a sample of the heatmap on Friday, revealing it will use a graduating colour scheme, stretching from white to red, to indicate the performance of funds across investment performance, fees and costs and sustainability of member outcomes.
Continuing on its agenda to weed out underperforming funds, the prudential regulator will be publishing assessments of performance based on measures and benchmarks across the three areas aforementioned and in due time, it will also include insurance.
First on the chopping block are MySuper or default funds, with their assessment to be released in mid-December. The heatmap will be expanded to include choice funds over time.
Bruce Murphy, director, Australia and New Zealand at BNY Mellon-owned Insight Investment commented he was concerned the heatmap could give consumers a superficial understanding of super funds, “with a single-minded focus” on returns and fees.
“Even though it’s well intentioned, to run and produce these heatmaps, I think that there’s a few concerns in there,” Mr Murphy said.
“Will risk be taken into account? It’s very easy for consumers to look at just performance, but if you look out there in the marketplace, the definition of a balanced fund is very unclear. Some will have around 80 per cent growth assets, some will only have 60 per cent.
“I just want to emphasise that risk is a key part of it. It’s always very hard to explain that, it always has been, to explain it to consumers.”
He added there are unclear definitions for consumers around what are growth assets, bond-like assets, infrastructure or underlying exposures.
“I do worry that what will happen if it’s not very carefully communicated in the positioning, is that it will cause a lot of churning in the industry,” Mr Murphy said.
“It will cause a lot of reaction – government has spoken, or the heatmaps have spoken, I shouldn’t be in any of these red traffic light funds or whatever it’s going to be. And if that’s based on any short-term performance measure, that’s just an unhealthy outcome.
“I do hope even though it’s well intentioned, that we avoid a big membership churn.”
He also argued APRA should have a deeper insight into fees, especially given costs and a wave of consolidation throughout the super industry.
“There needs to be a balance in our view. If you look at this objectively, the 10-year returns for example of the Future Fund, will be better than the top super performers and yet their fees are reasonably high,” Mr Murphy said.
“So they’ve found those pockets of alpha, they’ve generated that level of performance, they’ve got what they would argue and they’ve put on paper, lower risk, and they pay higher fees.
“At the end of the day, I think we’ve got to be very careful about having a siloed and a single-minded focus on fees. There’s opportunities out there to pick up for alpha that a) we’re looking for and b) will get a better return on investments and net return really counts.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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